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Chapter 3 Features and operation of facultative reinsurance 3/3

A3 Facultative non-proportional reinsurance

Consider this…
Having just learned about facultative proportional reinsurance, in what way would you expect facultative non-
proportional reinsurance to differ.

In facultative non-proportional or excess of loss reinsurance, the insurance company that is reinsured
retains a fixed monetary amount on a particular risk and arranges excess of loss protection with the
reinsurer to pay any claim amounts exceeding that fixed monetary retention up to a further defined
monetary amount. A fixed premium is paid by the reinsured to the reinsurer, usually at inception or by Chapter
instalments.
This method allows the reinsured to select a monetary retention, also known as a deductible or excess, 3
Allows the reinsured
below which the reinsured will retain all losses, but above which its reinsurer provides full to select a monetary
reimbursement up to the monetary amount, or limit, selected by the reinsured. retention
The main advantage to the reinsured is that it can control the amount of premium it is required to pay for
such excess of loss protection, which will not be on a ‘contributing’ or sharing basis as is the case with
proportional reinsurance.
This type of business is described as non-proportional because the reinsurer does not receive a fixed
proportion of the premium in relation to the risk, nor does it take a proportion of the claim. Once the
claim exceeds a set limit, e.g. a retention of £250,000, the reinsurance contract is obliged to respond to
the amount of loss in excess of that retention up to the limit of the reinsurance.

Example 3.1
Non-proportional reinsurance has been arranged for £500,000 excess of £250,000.
Loss £500,000 less reinsured’s retention £250,000 = £250,000 paid by reinsurers.
Reinsured’s share of loss = 50%.
Reinsurer’s share of loss = 50%. Reference copy for CII Face to Face Training

However, if the loss were £625,000 less retention £250,000 = £375,000 paid by reinsurer.
Reinsured’s share of loss = 40%.
Reinsurer’s share of loss = 60%.

A3A Features of facultative non-proportional reinsurance

Besides buying facultative excess of loss reinsurance for its own protection, the reinsured may decide it
Reinsured may
also wants to protect the cession made to its proportional treaty reinsurers. This is referred to as protect the cession
protecting the ‘common account’ and so benefits both the reinsured and its proportional treaty made to its
proportional treaty
reinsurers to the full sum insured potential of the original risk. An example of how this works can be reinsurers
seen in figure 3.1.